Four rules recently proposed or finalized by the Environmental Protection Agency (EPA) could prompt power companies to retrofit most coal-fired generating units and retire 2% to 12% of coal-fired capacity. The rules would also likely increase power prices in some regions, though they may not cause widespread reliability concerns, a new report by the Government Accountability Office (GAO) suggests.

The report, “Better Monitoring by Agencies Could Strengthen Efforts to Address Potential Challenges,” concludes a year-long performance audit of the EPA, the Federal Energy Regulatory Commission (FERC), and the Department of Energy (DOE). It seeks to determine how the now-defunct Cross-State Air Pollution Rule (CSAPR), the Mercury and Air Toxics Standards (MATS), the proposed Cooling Water Intake Structures regulation, and the proposed Disposal of Coal Combustion Residuals regulation could impact the power sector.

The report emphasizes that uncertainties loom over the regulations themselves. As POWERnews has reported, a federal court this week struck down the CSAPR, and several legal challenges have been directed at the MATS rule. "Furthermore, several bills have been introduced in Congress that would affect some or all of the regulations. Some power companies may delay taking actions to respond to these regulations until there is additional certainty about their final regulatory requirements."

The GAO report responds to a request by Sen. John Rockefeller (D-W.Va.) for available information on what actions power companies would take in response to the EPA’s four regulations, how they could affect the electricity market and reliability, and the extent to which the EPA, FERC, and the DOE could mitigate adverse reliability implications.

It also takes into account a December 2011 memorandum in which President Obama directed the EPA to promote early, coordinated, and orderly planning and execution of the measures needed to implement MATS while coordinating with the other two federal agencies to maintain electricity reliability.

According to the 105-page report, the EPA estimated that the CSAPR rule would have cost $900 million (in 2011 dollars) annually to implement (though it would have $128 billion to $299 billion in benefits annually); MATS would cost $10.2 billion a year (with between $39 billion and $96 billion in benefits); the coal residual rule would cost between $600 million and $1.5 billion annually (with benefits ranging from $90 million and $1.3 billion); and the cooling water intake rule would cost $400 million per year (with benefits of just $20 million).

The GAO estimated, citing an EPA report, that in addition to operating and maintenance costs, a typical coal-fueled unit with a capacity of 700 MW could incur costs from $287 million to $351 million to install a scrubber, from $116 million to $137 million to install a selective catalytic reduction unit, and from $97 million to $114 million to install a fabric filter. "Other controls are less expensive, and a 700 MW unit could incur $22 million to $43 million to install a dry sorbent injection unit or $4 to $5 million for an activated carbon injection unit." It also cited two reports–one by the Bipartisan Policy Center and the other by NERA Economic Consulting–that projected costs of actions power companies could take in response to the four regulations in the range of $16 billion to $21 billion.

Costs could also be incurred to build new generating capacity or upgrade transmission systems due to unit retirements, the GAO noted. The Midwest Independent Transmission System Operator (MISO), for example, has estimated that it could cost between $2 billion and $10 billion to offset capacity lost from coal plant retirements. An additional $580 million to $880 million will be required for transmission upgrades.

Electricity prices would also likely rise, the report found.  "Electricity prices may increase because the investments associated with the actions power companies take to respond to the EPA regulations, and any increases in the costs of generating electricity, would be passed on to customers to varying extents."

Critically, the GAO reported that while the EPA and DOE suggested that much of the power sector may be able to complete actions by compliance deadlines, industry disagreed, highlighting necessary regulatory approvals for retrofits, site-specific concerns for retrofits, and supply chain concerns.

Concerning reliability, actions taken in response to the regulations were "not likely" to cause widespread supply challenges. In general, the GAO found that capacity is expected to continue to exceed demand by the amount needed to maintain resource adequacy—"in some cases substantially." Only in Texas and New England could reserve margins fall below levels needed by 2015, the GAO noted.

The report found that existing tools could “help mitigate many, though not all, of the potential adverse implications associated with the four EPA regulations, but the Federal Energy Regulatory Commission (FERC), Department of Energy (DOE), and EPA do not have a joint, formal process to monitor industry’s progress in responding to the regulations.” Some tools, such as state regulatory reviews to evaluate the prudence of power company investments, may address some potential price increases, it said. Tools available to industry and regulators, as well as certain regulatory provisions, may address many potential reliability challenges. “However, because of certain limitations, these tools may not fully address all challenges where generating units needed for reliability are not in compliance by the deadlines.”

Finally, FERC, the DOE, and the EPA have not established a formal, documented process for jointly and routinely monitoring industry’s progress and, “absent such a process, the complexity and extent of potential reliability challenges may not be clear to these agencies,” the GAO found. “This may make it more difficult to assess whether existing tools are adequate or whether additional tools are needed.”
Sources: POWERnews, GAO
—Sonal Patel, Senior Writer (@POWERmagazine)